Reserve Bank reduces repo rate by 25 basis points

JOHANNESBURG, July 20 – The South African Reserve Bank (Sarb) announced on Thursday, that the MPC decided to reduce the repurchase rate by 25 basis points to 6.75 per annum due to the improved inflation outlook and the deteriorated growth outlook.

This will come as a relief for consumers after the bank left its benchmark repo rate unchanged at seven percent per annum in May, for the seventh time in a row since May 2016.

The prime lending rate, the figure charged by banks to customers, will now decline to 10.25 percent.

Reserve Bank governor Lesetja Kganyago announced that four members of the Monetary Policy Committee (MPC) preferred a reduction, while two members preferred an unchanged stance.

Kganyago said the underlying demand in the economy was extremely weak and the MPC is concerned about the deterioration in the growth outlook over the forecast period.

Despite this, Kganyago said the inflation outlook had improved significantly since the previous meeting of the MPC and had been fairly broad-based.

“As we have emphasised on numerous occasions, the MPC does not view monetary policy as the solution to the structural growth constraints in the economy. Nor does it believe that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty. It will however provide some relief at the margin,” Kganyago said.

“In this highly uncertain environment, future policy decisions will be dependent on data outcomes and our assessment of the balance of risks. We remain vigilant and would not hesitate to reverse this decision should the inflation outlook and risks deteriorate.”

Kganyago said a number of risks to the inflation outlook persisted and the MPC assessed the risks to the inflation outlook to be broadly balanced.

Although the rand has been relatively resilient, Kganyago said it remained vulnerable to heightened political uncertainty, global monetary policy developments and possible further credit ratings downgrades.

Kganyago said a further upside risk related to the possible supply side shock of a large electricity tariff increase from July next year.

Eskom has approached the National Energy Regulator of SA (Nersa) for an increase of around 20 percent, but the current forecast assumes an increase of eight percent. This assumption will be adjusted in line with any new determinations made by Nersa.

But on the positive side, Kganyago said inflation outlook was supported by a sustained narrowing of the current account deficit and positive investor sentiment towards emerging markets.

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